Integrators Aid Tax Agencies' Heavy Lifting

State and local tax agencies are relying on integrators more than ever to help them collect revenue and provide new services to boost their images and strengthen their collection processes.

State tax agencies are anxious to provide online services that include everything from reviewing past filings to filing returns to checking the status of refunds, analysts and industry executives said.

"All of the states are looking at either installing for the first time or substantially improving their customer facing [operations]," said John LaFaver, vice president of state and local solutions tax and revenue practice at American Management Systems Inc., Fairfax, Va.

About 40 states provide some type of online tax service, said Jonathan Lyon, senior staff associate at the Federation of Tax Administrators, an independent Washington-based organization that works to improve the quality of state tax administration.

Although the desire to provide online tax filing and related services remains a driving force in the sector, it is vying with emerging solutions, such as non-filer compliance, that can dramatically increase state and local revenues, said analysts and industry executives. Non-filer compliance is an automated process that matches income records against tax returns filed to produce a list of non-filers who are notified of their filing requirements via a request for a return.

"E-services and compliance are where we think this market is going," said Josh De Jong, an executive with IBM's Revenue Management practice. "[States] are getting a huge return on these projects. They are realizing tens of millions of dollars of additional revenue."

Tax collection from those who fail to comply with the law "is something that states are looking to replicate to improve tax collection in their own jurisdictions," said Rishi Sood, principal analyst at Gartner Dataquest, Stamford, Conn. Gartner Dataquest estimates the administration and finance market, which includes tax and revenue spending, will grow from $1.92 billion in 2000 to $2.94 billion by 2005.

State and local tax agencies are the workhorses of state government, Sood said. The tax agencies understand the importance of technology and put a lot of their resources into technology improvement, he said.

Systems integrators, including Accenture Ltd. of Reston, Va., AMS, Deloitte Consulting of New York, IBM Corp. of Armonk, N.Y., KPMG Consulting Inc. of McLean, Va., and Unisys Corp. of Blue Bell, Pa., are bidding on tax-related projects in Arizona, Connecticut and New York, analysts and industry executives said.

The Michigan Department of Treasury was getting ready to purchase an integrated tax system but decided instead to focus on customer relationship management in the immediate future, analysts and industry executives said.

An integrated tax system combines into one system all of the disparate tax and revenue functions, such as accounting, auditing, filing and registration. The foundation of an integrated system is a single database into which all functions, including online applications, are tied. It allows state employees to look at each customer from a holistic standpoint.

IBM has completed a tax data warehouse for New York and is now constructing a tax profile management system that the state will use to select taxpayers for audit, De Jong said.

"There are a lot of opportunities around the country right now," said LaFaver. "Each state is looking to improve its dealings with citizens."

At the local level, Unisys has been selected to provide an integrated tax system for Los Angeles. The project is estimated to be worth about $10 million, said Robert Hanks, director of Unisys North America Global Public Sector's tax, revenue and labor practice.

An integrated tax system can cost less than $10 million, but additional functions might drive up the cost to as much as $40 million or $50 million, Hanks said.

Unisys is refining an integrated tax package based on its experience providing tax systems to customers in two states and six cities, he said.

Accenture is still working on an integrated tax system for Washington, D.C. In the past few months, the company opened an electronic service center that allows corporate taxpayers to manage their accounts online, said Tim Finnegan, a partner at Accenture's Global Government practice.

A few states have chosen to fund integrated tax systems or non-filer compliance projects through a benefits-based funding model, in which the contractor builds the system at its own expense and is paid by the state with money collected using the new system. AMS and IBM both have completed major projects for the California Franchise Tax Board this year that used the benefits-based funding model.

IBM provided the tax board with a non-filer compliance solution comprising eight major component categories, including a data warehouse and customer relationship management software.

The IBM project received an award for a compliance tax system from the Federation of Tax Administrators in May, and was paid about $30 million for the project through a performance-based, benefits-funded contract, said Patrick Hill, a board spokesman.

"California has built a foundation that will allow it the flexibility to add on e-services," said Bryan Barton, managing executive at IBM Global Services' global government finance practice. "The [non-filer compliance] project expands and reinforces that foundation."

At this time, the non-filer compliance is active only for personal income tax non-filers and will be active for corporate income tax non-filers later this year, Hill said.

AMS has completed three projects for the board in the past decade, including a collection account processing system, a professional audit support system, and most recently an accounts receivable collection system for which it was paid $23 million through a benefits-funded contract, the company said.

AMS' integrated tax systems in Kansas and Virginia also use a performance-based, benefits-funded approach, said LaFaver.

The states whose procurement regulations allow more flexibility are the ones that use benefits-based funding, Barton said.

But the benefits-based funding model, which began at the state level about six years ago, has not been widely adopted by the states, Sood said. This indicates it is proving difficult to use, he said.

Industry executives see unemployment benefit administration as a new opportunity for integrators with tax and revenue experience. This program often falls under state departments of labor.

Barton said several different agencies, such as labor, have reporting attributes similar to the tax sector. Just like tax departments, other departments and agencies require filing, collecting and distributing funds, and monitor for fraud and compliance.

Many of these systems are 15 to 25 years old and are in need of replacement, said industry executives.

"This is likely to be a potential future market for firms that build large tax systems," said LaFaver, who said AMS is already pursuing this opportunity.

"This is one area that will really be exploding over the next year," Hanks said.

Indeed, some states have gone so far as to consolidate the tax and unemployment insurance operations, said Finnegan, who said that in Maine and Montana, the revenue agency is handling the unemployment insurance programs.

"Agencies are starting to look at whether those functions might be rolled together," he said. When this happens, the process becomes more of a revenue than a tax operation, Finnegan said.

Despite the enthusiasm of industry executives, Sood remains wary.

Although unemployment benefit administration is a worthwhile long-term strategic goal, it is unlikely to prove a substantial pathway to profit in the short term, he said.